PROSPECTS FOR ECONOMY REVISED DOWNWARD — AGAIN

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EDITOR’S COMMENT: Here it is again. Economists have revised their projections for growth. DOWN AGAIN. In other words, all those projections over the last couple years that presumed we could recover without fixing the mortgage and housing scam were wrong.

Forecasts for Growth Drop, Some Sharply

By

A drumbeat of disappointing data about consumer behavior, factory sales and weak hiring in recent weeks has prompted economists to ratchet down their 2011 economic forecasts to as little as half what they expected at the beginning of the year.

Two months ago, Goldman Sachs projected that the economy would grow at a 4 percent annual rate in the quarter ending in June. The company now expects the government to report no more than 2 percent growth when data for the second quarter is released in a few weeks. Macroeconomic Advisers, a research firm, projected 3.5 percent growth back in April and is now down to just 2.1 percent for this quarter.

Both these firms, well respected in their analysis, have cut their forecasts for the second half of the year as well. Then this week, the Federal Reserve downgraded its projections for the full year, to under 3 percent growth. It started the year with guidance as high as 3.9 percent.

Two years into the official recovery, the economy is still behaving like a plane taxiing indefinitely on the runway. Few economists are predicting an out-and-out return to recession, but the risk has increased, with the health of the American economy depending in part on what is really “transitory.”

During the first press conference in the central bank’s history two months ago, Federal Reserve Chairman Ben S. Bernanke used the word to describe factors — including supply chain disruptions after the earthquake and tsunami in Japan and rising oil prices — that were restraining economic growth in the first half of the year. Earlier this week, Mr. Bernanke confessed that “some of these headwinds may be stronger and more persistent than we thought,” adding, “we don’t have a precise read on why this slower pace of growth is persisting.”

Economists say the unexpected shocks from Japan and the Middle East in the first half of the year go only partway toward explaining the deceleration. Many worries remain: housing prices have continued to fall, hiring is weak, wages are flat, growth in emerging economies like China and India is slowing and the debt crisis in Europe could have ripple effects.

What’s more, government stimulants like the payroll tax cut and the extension of unemployment benefits are scheduled to expire at the end of this year. With the underlying economy undeniably tepid, economists are concerned that further shocks to the system could knock the country off its slow upward trajectory.

“The likelihood of a negative surprise is bigger than the likelihood of a positive surprise,” said Jerry A. Webman, chief economist at OppenheimerFunds.

There was a glimmer of hope on Friday when the government reported that orders for appliances and other equipment from manufacturers were higher than expected in May. And the Commerce Department edged up its estimate of growth in the first three months of the year to 1.9 percent, from 1.8 percent.

The slow place of the economy’s expansion is not entirely surprising, though it is clearly painful for those who are out of work and whose homes are worth far less than a few years ago. Many economists, most prominently Kenneth S. Rogoff and Carmen M. Reinhart, have emphasized that recovering from a financial crisis takes much longer than from a normal cyclical recession.

Jan Hatzius, the chief United States economist at Goldman Sachs, said that in fact, households appeared to be paying down debt largely as expected. “Most of the things that looked like they were improving six months ago still look like they are improving,” he said.

Analysts generally expect the economy to pick up in the second half as supplies from Japan come back and car production resumes at some temporarily idled plants. “Parts producers are getting back online a lot quicker than anybody had thought,” said Ben Herzon, a senior economist at Macroeconomic Advisers. The firm is forecasting 3.5 percent overall economic growth in the second half of the year, though that is down from its projection at the beginning of the year of 4 to 4.5 percent.

Consumer spending has been lukewarm as people have cut back elsewhere to cover for higher prices at the pump. Although gas prices have eased in the wake of the International Energy Agency’s announcement that it would release some emergency stockpiles of oil, there is no guarantee prices won’t climb again as turmoil in the Middle East continues. In the meantime, customers remain wary.

“A lot of the factors that will give us a boost in the second half are largely temporary and will run their course at some point,” said David Greenlaw, chief United States economist at Morgan Stanley.

At Young Ford, a car dealership in Charlotte, N.C., David McKinney, operations manager, said that while sales had perked up in the spring, buyers were now holding back. “The psychology is going to take a little while to work through,” he said. He added that consumers were having a hard time obtaining satisfactory loan terms.

Many consumers, he said, were simply afraid to make big commitments while uncertainty hung like a haze over the economy. “We need to let the middle class catch the rabbit,” he said. “Tell them they can go to work 50 hours a week, go to the beach and send their kids to the college and they’ll just keep chasing the rabbit. But now they’re not even sure their job will be there.”

Economists are waiting to see whether the disappointing Labor Department report of hiring in May — which showed that employers added just 54,000 jobs, hardly enough to keep up with normal population growth, much less dent the unemployment rate — was an anomaly or the sign of a significant stall.

Companies have given mixed signs of hiring plans. At United Parcel Service, the package delivery giant, volumes declined slightly in the first quarter, and the company is now hiring only seasonal workers or filling in jobs as people leave, not adding new positions. “Our business model is very simple,” said Norman Black, a company spokesman. “Packages equals jobs.”

Caterpillar, the large equipment manufacturer, has added 7,300 jobs in this country over the last year. With new factories in Muncie, Ind.; Winston-Salem, N.C.; and Texas, the company will continue to hire in the second half, said Jim Dugan, a company spokesman. But he declined to say how many workers would be added.

Given the clouded outlook on hiring and the potential for further shocks, Mr. Hatzius of Goldman Sachs said that he could not rule out another recession. “We’re still a reasonable way off from that,” he said. “But I’m not as confident as I would like to be.”

4 Responses

  1. First off, this reporter is listening to the wrong people. He listens to Federal Reserve Chairman Ben S. Bernanke and Goldman Sach’s pitchmen and expects the truth?
    Our economy is totally in the toilet, has been and will remain until major changes occur.
    We have been losing ground for 30 years. First by the open door policy to China, then by NAFTA, then by lie’s that have lead to two wars, and the most massive fraud ever perpertrated in the history of the world, by Wall Street and the two big to fail, to big to prosecute banks.

  2. O’s hiring the WS construction workers to fix the US economy and the markets was wrong.

    We all know that there is no “trickle down” economics when the wall street executives and bankers are in charge of it…. They cut labors /their costs and send all the jobs abroad/invest the ultimate free money borrowed from FED to pump the emerging market/hire those cheap labors.

    O said that there are some compromises that the American have to make… Oh, Yah. It was compromised of the U.S. Tax Payers and the people themselves.

  3. Where in this analysis is there any acknowledgment that, with the pull-out from Afghanistan, we are going to see these vets in the unemployment lines?

    I just do not see where the analysis has really accounted for all the negative forces on the economy and this is part of the reason they just KEEP getting the predictions so WRONG.

    And of COURSE they can NEVER acknowledge what REALLY needs to be done in the housing and mortgage MESS.

    With a fragile economy, is this administration planning on hiring a bunch of the returning vets to act as guards to quell civil unrest, if it comes to that? Hey that would keep those vets from joining in any civil disobedience.

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